If you sell a property and it happens to be your main residence, you’re likely to be able to avoid capital gains tax charges due to a mechanism known as ‘principal private residence relief’ (PPR). In this blog, we’ll discuss some of the key elements of this relief, as well as a recent, relevant legal case.
What is Capital Gains Tax?
If you sell or dispose of an asset that’s increased in value, capital gains tax is applied to the profit. The term ‘disposing’ encompasses several actions – such as selling, swapping, or even gifting the asset – and there are a number of assets that will be subject to capital gains tax charges: moveable assets (such as shares) and heritable assets (i.e. a property).
What is Principal Private Residence Relief (PPR)?
If you sell a property and it has genuinely served as your main residence for a period, you won’t be required to pay capital gains tax for the years you lived in the home as well as the last eighteen months of ownership (whether you lived there or not). For people who move into a care home or those with a disability, up to 36 months of past ownership can be claimed.
However, you may still have to pay capital gains charges if the following apply:
• If the grounds (including all buildings) cover more than 5,000 square metres.
• If you let out some or all of your home – unless you live in the property as well and only have a single lodger.
• If you moved out of your home more than eighteen months ago.
• If you used part of your home exclusively for business purposes, or if you bought the property with the sole intention of making a gain (with the aim of renovating it and selling it on, for instance).
The Autumn Budget announced some potential changes that could affect the amount of capital gains tax owed on sales of main residences. It is being proposed that, from April 2020, the private residence relief period will be shortened to the final nine months of ownership (down from eighteen months) as well as the years the seller lived in the property. However, for people with a disability or those who move into a care home, the 36-month rule will still apply. The government intends to consult on these changes.
The HMRC v Higgins Case
Capital gains tax and private residence relief has been in the news recently due to a number of high-profile legal proceedings, most pertinently the case of HMRC v Higgins. This legal matter concerned Mr Higgins, who purchased a property in 2006 before building work commenced. The renovations were not complete until January 2010, at which point Mr Higgins moved in.
When Mr Higgins sold the property in 2012, he claimed PPR for the full period of ownership (including the 39 months between the date of purchase in 2006 and when he actually moved in in 2010). HMRC took the view that Mr Higgins was not entitled to PPR during those 39 months, and this resulted in a substantial CGT liability (over £60,000).
Initially, Mr Higgins’ appeal against the capital gains tax charges was successful: it was decided that he should be due the full relief, as the property was technically his main residence throughout the full period of his ownership (he did not own another property). However in late September 2018 HMRC had the ruling overturned through appeal, arguing that capital gains tax applies from the moment contracts are exchanged, but PPR only applies for the period in which the taxpayer occupies the property. Mr Higgins has now been ordered to pay the full CGT amount of £61,383.
The case makes it clear that despite the attractive exemption offered by PPR, it would be wise consider CGT implications carefully before purchasing a property, particularly if renovations are to be made.
The rules surrounding CGT can be complex, particularly when considering any reliefs that may be available. If you own property in the UK and want to ensure that you are able to take full advantage of PPR, please enlist the services of an IBISS & Co tax adviser without delay. Our expert team has years of experience handling property taxes for a number of clients – both UK and non UK residents – and will ensure that your affairs are structured in the most beneficial manner.